What does Brexit mean for international financial centres?

The UK referendum result has global ramifications, affecting different jurisdictions in different ways. In particular, the smaller international financial centres of Europe will be heavily impacted, as significant changes in world markets invariably lead to reallocation and movement of the sorts of resources and structures these jurisdictions specialise in. In this article we summarise the likely medium and long term impact on the the Isle of Man, Channel Islands, Gibraltar, and Malta.

The Isle of Man

Public opinion in the Isle of Man fell down on the side of remain, a stance which was even more pronounced amongst the business community. As a Crown Dependency, however, Manx residents were not able to vote.

The Island’s relationship with the EU is complicated, being governed by Protocol 3 of the UK’s Treaty of Accession. The Isle of Man has a Customs and Excise and VAT-sharing agreement with the UK which means that the Isle of Man is effectively part of the fiscal territory of the EU.

In the short term, the Island’s financial services sector will be challenged by the volatility in world markets. Long term financial sector prospects, however, depend on the outcome of the UK’s negotiations with Europe over the next two years, as the Island is not a sovereign nation and will not be able to negotiate with the EU directly. Depending on how that unfolds, several other sectors may be adversely affected, including agriculture, fishing, manufacturing, and VAT planning around shipping, yachts, and aircraft.

The Island’s eGaming sector, which is now its single largest contributor to GDP, should be relatively resilient whatever happens, because it is heavily (though not entirely) focused on non-European markets and software development. As the Isle of Man in my opinion has a more diverse economy than the other Crown Dependencies, it may be less exposed than the Channel Islands to fallout from the Brexit decision. Indeed, there may even be significant opportunities for the Isle of Man in the medium term.

The Channel Islands

Like the Isle of Man, the Channel Islands are Crown Dependencies and their relationship with the EU is therefore governed by Protocol 3. Also similarly to the Isle of Man, they were broadly pro-Remain prior to the vote (marginally more so). Unlike the Isle of Man, however, they don’t have the same VAT sharing agreement. As a result, they don’t have an exposed VAT planning sector as the Isle of Man does.

The Channel Islands, however, are even more tied to the fate of London than the Isle of Man is. This is not necessarily a weakness, but as their economies are in my opinion less diversified outside of financial services, the ultimate outcome of the UK’s negotiations with Europe in this area will have a more significant impact in Jersey and Guernsey than in the Celtic peer.

The fall in Sterling may be an overall positive note for the Channel Islands, making them more attractive in terms of both international services and tourism. Whether this and similar opportunities prove enough to counteract any potential uncertainty around the impact on financial services remains to be seen, but the political leadership of the Islands and the business community appear to be relatively positive about their prospects.

Gibraltar

As a British Overseas Territory, Gibraltar is more closely tied to the UK and its relationship with Europe than the Crown Dependencies are. The people of Gibraltar were able to vote in the referendum and it is telling that they voted by almost 98% to remain.

Of the English-speaking financial centres, this is the one with the clearest negative consequences from Brexit. Many of its financial service companies rely on the EU’s ‘passporting’ rules for a significant portion of their business. Losing this ability will be a significant blow for the jurisdiction, but that will of course depend on what Britain does next.

The possibility of a Spanish takeover has been suggested by both the British press and Spanish politicians, but the reality is that this is highly unlikely. However, the ongoing border dispute with Spain could become a serious issue. Spain has used border disruption to put pressure on Gibraltar before, a tactic which was limited primarily by EU rules and oversight. Given the number of goods and workers that the peninsula needs to come across the border every day simply to sustain business as usual, any increased leeway Spain might have to disrupt the border after a British exit could cause significant difficulties. On top of such essentials, it would also substantially limit the leisure options of people living and working in Gibraltar, who regularly cross into Spain for shopping, golf days, or nights out. In addition to the impact on the quality of life expected by their employees, a belligerent Spain could do a lot more to damage the Gibraltar’s companies if a dispute escalated – such as severely inhibit the jurisdiction’s telecommunications infrastructure.

Uncertainty over these problems could be damaging for Gibraltar in the short to medium term, as both companies and skilled workers weigh up the risks versus the costs of moving – with Malta and the Isle of Man likely candidates for those looking to move. If early negotiations by the UK start to move in a positive direction, however, this fate may yet be averted.

Malta

Compared to the other international financial centres considered here, Malta is much less directly impacted by the referendum result. As it is a sovereign member of the European Union, the major result is that it may benefit indirectly from some of the uncertainty and negative effects listed above with regards to its competitors.

If the Isle of Man’s VAT planning sector is set to diminish in the long term, then Malta is the most likely candidate to gain as a result. A lot of VAT planning revolves around luxury assets such as yachts and private aircraft, which Malta is already well positioned to attract. It will also be an attractive jurisdiction for domiciling UK and Gibraltar companies that relied heavily on their unfettered access to EU markets, particularly for the purposes of passporting. The primary advantage of Malta is that it is English speaking, of course, although there are several other potential benefits that will make it attractive in these cricumstances.

It isn’t all good news, though. The fall in Sterling may have an impact on Malta’s tourism industry, which has traditionally attracted many British holidaymakers every year. The jurisdiction may also suffer from losing Britain’s influence within the EU, as it possible France and Germany will push for greater tax harmonization with ‘British roadblock’ removed.

Conclusion

The ultimate results of Brexit remain anybody’s guess. The Chief Minister of the Isle of Man summarised the situation well when he announced recently that Brexit had set the Island on a ‘journey into the unknown’. However, it is recognised by the business communities in each of these jurisdictions that, whilst the uncertainty may in itself be troublesome, there are opportunities for winners as well as losers in the changes to come.

The one thing all of these jurisdictions have in common will be a degree of impatience. The quicker Article 50 is triggered (if it ever is) and negotiations begin, the quicker these jurisdictions will gain clarity on where they stand (or in the case of Malta, where their competitors stand). Speed would be in their favour, as they are all agile and adaptable jurisdictions as a result of their size, and legislators will be eager to get ahead of the curve.

In this, the IFCs may be disappointed, as little urgency has been shown in Westminster to proceed. Indeed, there are several challenges underway which may cause significant delays, such as Mishcon de Reya’s recent bid to force a Parliamentary vote and calls by several politicians for Article 50 to only be triggered after a general election.

Katherine Ellis - Group Director - Business Development

Katherine leads all of Boston Group’s business development and marketing functions. She was appointed in 2012 to drive Boston’s ambitious international growth strategy and brings almost two decades of experience in the offshore market, with particular knowledge of luxury assets.

Boston Limited is licensed by the Isle of Man Financial Services Authority.
Boston Trust Limited is licensed by the Malta Financial Services Authority to provide trust and fiduciary services in terms of the Trusts and Trustees Act.